Tuesday, November 22, 2016

First, these October existing home sales closed escrow before the recent increase in mortgage rates (rates started increasing after the election). Also, the recent increase in mortgage rates will probably have little impact on November closed sales, since most of those sales were already in process.

With the recent increase in rates, I'd expect some decline in sales volume as happened following the "taper tantrum" in 2013. So we might see sales fall to 5 million SAAR or below over the next 6 months. That would still be solid existing home sales. We might also see a little more inventory in the coming months, and therefore less price appreciation.

Usually a change in interest rates impacts new home sales first, because new home sales are reported when the contract is signed, whereas existing home sales are reported when the contract closes. So we might see some impact on new home sales for November (not October since that was before the recent increase).

On inventory, here is a repeat of some comments I wrote earlier: I expected some increase in inventory last year, but that didn't happened. Inventory is still very low and falling year-over-year (down 4.3% year-over-year in October). More inventory would probably mean smaller price increases and slightly higher sales, and less inventory means lower sales and somewhat larger price increases.

Two of the key reasons inventory is low: 1) A large number of single family home and condos were converted to rental units. Last year, housing economist Tom Lawler estimated there were 17.5 million renter occupied single family homes in the U.S., up from 10.7 million in 2000. Many of these houses were purchased by investors, and rents have increased substantially, and the investors are not selling (even though prices have increased too). Most of these rental conversions were at the lower end, and that is limiting the supply for first time buyers. 2) Baby boomers are aging in place (people tend to downsize when they are 75 or 80, in another 10 to 20 years for the boomers). Instead we are seeing a surge in home improvement spending, and this is also limiting supply.

Of course low inventory keeps potential move-up buyers from selling too. If someone looks around for another home, and inventory is lean, they may decide to just stay and upgrade.

A key point: Some areas are already seeing more inventory. For example, there is more inventory in some coastal areas of California, in New York city and for high rise condos in Miami.

The following graph shows existing home sales Not Seasonally Adjusted (NSA).

Click on graph for larger image.

Sales NSA in October (red column) were the highest for October since 2006 (NSA).

Note that sales NSA are in the slower Fall period, and will really slow seasonally in January and February.